Workers’ compensation insurance is required for contractors with employees in most states. It covers injuries and illnesses that occur while workers are on the job, and protects companies from lawsuits regarding injuries and illnesses. General contractors and subcontractors both need workers comp insurance, unless they’re a sole proprietorship.

We’re going to take a closer look at what workers comp covers, how it works, and how much it costs.

What is workers’ compensation insurance?

Workers’ compensation insurance covers medical costs and lost wages for work-related injuries and illnesses. This type of insurance is required in almost every state for businesses that employ workers. Some states require that all contractors have compensation insurance, such as Pennsylvania, while others, like Georgia, only require it when a business has three or more employees.

Four states have a required fund that provides workers comp insurance to all businesses operating in the state: North Dakota, Ohio, Washington, and Wyoming. Businesses must purchase workers comp insurance from the state fund, or show they have adequate coverage from an outside insurance company.

Most workers’ comp insurance policies exclude management and ownership, however, coverage for these positions can be purchased if desired.

Why do you need workers’ compensation insurance?

Construction is a high-risk industry. Injuries or illnesses caused by the work environment can cost companies a lot of money, not just in medical expenses but also worker downtime. Workers comp insurance helps to mitigate the potential high costs of injuries and illnesses.

Workers comp covers the medical expenses and partial lost wages for sick or injured employees. The injured worker deals directly with the insurance company and their medical provider. This helps the company to continue to focus on their business.

Workers comp often includes employers’ liability insurance, which covers a company if an employee sues the owner over an injury or illness. Employers’ liability covers attorney’s fees, court costs, and settlements.

Learn more about insurance for contractors: 16 Types of Insurance for Construction Businesses

What workers’ comp insurance covers

Workers compensation insurance covers the following costs related to a work-related injury or illness:

  • Medical costs, such as an emergency room visit or treatment
  • Ongoing costs, such as rehabilitation or physical therapy
  • Partial lost wages while the employee is unable to work
  • Attorney’s fees, court costs, and settlements if sued by an employee

Dig deeper: Does Workers’ Compensation Cover Coronavirus in Construction?

How much it costs

According to Progressive Insurance, the average monthly cost for workers’ compensation insurance in 2020 was $86. However, the rate a particular company pays is based on three factors: worker classification, experience modification rate, and the amount of payroll paid.

Worker classifications are based on the type of work each worker is performing. Examples include carpenter, laborer, and office work. The more risk involved in the work, the higher the insurance rate.

The experience modification rate, or EMR, is dependent on the claims history of the company. A standard EMR is 1.0. The lower your EMR, the fewer claims you’ve made, and the higher the EMR, the more claims you’ve made. The EMR is usually adjusted every year.

Workers comp insurance is also based on the amount of payroll that a company pays. To calculate the workers’ comp premium, the following formula is used:

Classification rate x EMR x (Payroll $ / 100) = Premium

To ensure that the correct premium has been paid, most insurance companies audit a company’s payroll records once a year. They use this time to confirm the amount of payroll paid, confirm the classifications used, and ensure that the correct premium was paid.

FAQs about workers compensation

What doesn’t workers compensation insurance cover?

Any injuries or illnesses that occur outside of work, intentional injuries, injuries that occur while commuting to and from work, and injuries due to intoxication or substance abuse.

Who is covered by workers compensation insurance?

This varies based on where the business operates from. For example, certain types of employees, like seasonal workers, may not be covered by workers comp in some states. Contact an insurance company in your area to determine who is covered in your state.

Does a sole proprietor need workers compensation insurance?

Most states don’t require sole proprietors to carry workers compensation insurance, but laws vary. You can always choose to purchase this insurance if you desire.

Are subcontractors covered under workers compensation insurance?

In some states contractors can be entitled to workers compensation coverage if they’re injured or become ill on the job. Contact a local agency to determine the laws in your area.

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